THE FIVE GENERIC COMPETITIVE STRATEGIES

Chapter 5MGT 4380

Strategic Management Process

What is a competitive strategy?

Competitive StrategyConcerns management’s "game plan" for competing successfully and securing a competitive advantage over rivals (strategy as…PLAN)

Represents the firm’s specific efforts to provide superior value to customers by offering:

An equally good product at a lower price (low cost)

A superior product with unique features perceived as worth paying more for (differentiation)

An attractive overall mix of price, features, quality, service, and other appealing attributes (best cost)

Creating Value…?

SellingPrice

Total Costto the Firm

Profit

This area represents the firm’s total costs in presenting the

product or service for sale. To create new value, the firm must

cover its total costs.

CustomerValue

Consumer Surplus

This area represents the value created in each profitable sale and consists of both profit to the firm

and surplus to the customer.

KEYAdopting and adapting a strategy or

strategies that balance firm costs, profit, and overall value for customers

COGS

Total Value

The Five Generic Competitive Strategies

Low-Cost StrategiesFirms offer a broader array of products and/or services at a relatively low price

Has a lower cost than rivals—but not necessarily the absolutely lowest possible costIncludes features and services that buyers consider essential, but little moreIs viewed by consumers as offering equivalent or higher value even if priced lower than competing products (i.e., Great Value v. name-brand products

How do low-cost strategies work?

Option 1

Use lower-cost advantage to under-price competitors and attract price-sensitive buyers

Lower profit margins than competitors mean firms must sell in large volume

Option 2

Maintain present price and current market share and use lower-cost edge to earn higher profit margin

Higher profit margin means that firms can sell less than competitors and earn more

How can firms develop a low-cost strategy?1. Perform essential value chain activities more

cost-effectively than rivals• E.g., better access to raw materials, more efficient

production, cheaper distribution, etc.

2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities• Eliminate non-essential costs• E.g., reduce input/production quality, concentrate on

markets that are easy to access

Other ways to manage the value chain…

Striving to capture all available economies of scale

Taking full advantage of experience and learning curve effects

Trying to operate facilities at full capacity

Pursuing efforts to boost sales volumes and thus spread outlays for R&D, advertising, and general administration over more units

Substituting lower-cost inputs whenever there’s little or no sacrifice in product quality or product performance

Employing advanced production technology and process design to improve overall efficiency

Using communication systems and information technology to achieve operating efficiencies

Pursuing ways to reduce workforce size and lower overall compensation costs

Using the company’s bargaining power vis-à-vis suppliers to gain concessions

Being alert to the cost advantages of outsourcing and vertical integration

When does a low-cost strategy work best?

1. Price competition among rival sellers is especially vigorous.

2. The products of rival sellers are essentially identical and are readily available from several sellers.

3. There are few ways to achieve product differentiation that have value to buyers.

4. Buyers incur low costs in switching their purchases from one seller to another.

5. The majority of industry sales are made to a few, large-volume buyers.

6. Industry newcomers use introductory low prices to attract buyers and build a customer base.

What are the pitfalls to avoid in a low-cost strategy?1. Overly aggressive price cutting

Price cutting results in lower margins, no increase in sales volume, and lower profitability

2. Reliance on easily-imitated cost reductions

3. Becoming too fixated on cost reductionIgnoring buyer interest in additional features

Overlooking declining buyer sensitivity to price

Denying technological breakthroughs that will nullify cost advantages

Broad Differentiation Strategies

Firms offer broader array of products and/or services that are unique from others

Useful whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product or service

Involves incorporating differentiating features that cause buyers to prefer one firm’s brand, product, or service over those of its rivals (i.e., branding, market pioneering, etc)

Requires not spending more to achieve differentiation than the price premium that customers are willing to pay for all the differentiating extras

What are the benefits of a differentiation strategy?

Command a premium price

Gain buyer loyalty to its brand

Successful execution of a differentiation strategy

allows a firm to:

Increase its unit sales

Just think about Apple….

What are the different approaches to a differentiation strategy?

Unique taste: Red Bull, Dr. Pepper

Multiple features: Microsoft Office, Apple iPhone

Wide selection and one-stop shopping: Home Depot, Amazon.com

Superior service: Ritz-Carlton, Nordstrom

Spare parts availability: Caterpillar, John Deere

Engineering design and performance: Mercedes-Benz, BMW

Luxury and prestige: Rolex, Gucci, Chanel

Product reliability: Johnson & Johnson

Quality manufacture: Michelin in tires, Honda in automobiles

Technological leadership: 3M Company

Full range of services: Charles Schwab in stock brokerage

Complete line of products: Campbell soups, Frito-Lay snack foods

How does a differentiation strategy create value?

1. Includes product attributes and user features that lower the buyer’s costs• E.g., hybrid cars save gas, professional tax prep may

help save money, etc

2. Incorporates tangible features that improve product performance• E.g., engine turbo, high performance processor, etc

3. Incorporates intangible features that enhance buyer satisfaction in noneconomic ways• E.g., supports a certain cause (i.e., Girl Scout cookies)

How can firms develop a differentiation strategy?

Manufacturing activities

Distribution and shipping activities

Marketing, sales, and customer

service activities

Activities that Enhance Differentiation

Supply chain activities

Product R&D

Production R&D and technology-related activities

When does a differentiation strategy work best?

1. Buyer needs and uses of the product are diverse.

2. There are many ways to differentiate the product or service that have value to buyers.

3. Few rival firms are following a similar differentiation approach.

4. Technological change is fast-paced and competition revolves around rapidly evolving product features.

What are the pitfalls to avoid in a differentiation strategy?

Pursuing a differentiation strategy keyed to product or service attributes that are easily and quickly copied.

Incorporating product features or attributes in which buyers see little value or are easily copied by rivals.

Overspending on efforts to differentiate.

Over-differentiating so that product quality or service levels exceed buyers’ needs.

Trying to charge too high a price premium.

Not opening up meaningful gaps in quality or service or performance features over the products of rivals.

Focused Strategies

Reflect a concentration on a narrow piece of the total market defined by geographic uniqueness or special product attributes

Can be either (1) low-cost focused or (2) differentiation focused

Appeal to smaller and medium-sized firms that may lack the breadth and depth of resources to tackle going after a whole market customer base

Focused Low-Cost Strategy

A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and a lower price than rival competitors

E.g., Vizio TVs, Acer PCs, etc.

Avenues to achieving cost advantage are the same as for low-cost leadership1. out-manage rivals in keeping costs low2. bypassing or reducing nonessential activities

Focused Differentiation Strategy

Keyed to offering carefully designed products or services to appeal to the unique preferences and needs of a narrow, well-defined group of buyers

E.g., Kashi, Tesla, Helly Hanson, etc.

As opposed to a broad differentiation strategy aimed at many buyer groups and market segments

When is a focused strategy viable?

The target market niche is big enough to be profitable and offers good growth potential

Industry leaders have chosen not to compete in the niche—focusers can avoid battling head-to-head against the industry’s biggest and strongest competitors

It is costly or difficult for multi-segment competitors to meet the specialized needs of niche buyers and at the same time satisfy the expectations of mainstream customers

The industry has many different niches and segments, thereby allowing a focuser to pick a niche suited to its resource strengths and capabilities

Few, if any, rivals are attempting to specialize in the same target segment

What are the pitfalls of a focused strategy?

1. If and when competitors find effective ways to match a focuser’s capabilities in serving the target niche

2. If and when the preferences and needs of niche members shift over time toward the product attributes desired by the majority of buyers (the few join the many)

3. If and when the segment may become so attractive it is soon inundated with competitors

Best-Cost Strategies

Are a hybrid of low-cost provider and differentiation strategies that:

Involves giving customers more value for money by satisfying buyer expectations on key quality/features/ performance/service attributes and beating customer expectations on price

Is a powerful competitive approach with value-conscious buyers looking for a good-to-very-good product or service at an economical price

Creates a “best-cost” status as the low-cost provider of a product or service with upscale attributes

How can firms develop a best-cost strategy?

Best-cost strategies are contingent on:1. A superior value chain configuration that

eliminates or minimizes activities that do not add value

2. Unmatched efficiency in managing essential value chain activities

3. Core competencies that allow differentiating attributes to be incorporated at a low cost

When does a best-cost strategy work best?

A best-cost provider strategy works best in markets where:

Product differentiation is the norm (e.g., clothing)

The market is comprised of large numbers of value-conscious buyers attracted to economically priced midrange products and services, especially during recessionary times (e.g., food service)

A provider can offer either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher-than-average price (e.g., automobiles)

What are the pitfalls of a best-cost strategy?

Vulnerability to both low-cost providers and high-end differentiators

May not have the core capabilities to manage the value chain such that the firm can produce higher-quality products at a lower price

Difficult to “serve two masters”—quality and price

Often, firms that attempt a best-cost strategy get “stuck in the middle”

Getting “stuck in the middle”

Compromise strategies can result in middle-of-the-pack industry rankings and, at best, average performance due to:

An average cost structure Minimal product differentiation relative to rivals An average image and reputation Limited prospect of industry leadership

Compromise or middle-ground strategies rarely produce sustainable competitive advantage

Examples include: K-Mart, GM, American Airlines

Successful Competitive Strategies Are Resource Based

Low-Cost ProvidersMust have the resources and capabilities to keep costs below those of competitorsMust have expertise to cost-effectively manage value chain activities better than rivals

DifferentiatorsMust have the resources and capabilities to incorporate unique attributes that a broad range of buyers will find appealing and worth paying for

Successful Competitive Strategies Are Resource Based

Narrow Segment FocusersMust have the capability to do an outstanding job of identifying and satisfying the needs and expectations of niche buyers

Best-Cost ProvidersMust have the resources and capabilities to incorporate upscale product or service attributes at a lower cost than rivals